- Consumers want to get the best value for their purchasing dollar. Therefore, when shopping for a credit card, they look for the lowest interest rate, absence of fees and most liberal payment terms. For bad credit customers, the search is more constrained. Because of previous shaky credit usage, customers with a FICO score below 600 have to pay the bank for the risk in lending to them. The consumer ends up paying higher fees and interest than others might. However, these card companies report the new, good payment history to the credit bureaus, effectively repairing bad past usage and establishing new history. With proper use, a customer can rehabilitate credit and move onto better financial offerings that cost much less.
- Bad credit charge cards have common factors that distinguish them from offerings for those with preferred credit. First, the interest rate is usually higher, often topping 20 percent. APR. Second, there's usually a substantial annual fee. Third, there may also be a fee to apply for and keep the card. Last, these cards often lack the rewards programs of other cards for better credit. A bad credit charge card is definitely meant to be used as a tool for rebuilding credit, not as a way to keep up past negative habits.
- One common type of bad credit charge card is the secured card. A secured card has a credit line equal to a deposit amount that the bank holds in the cardholder's name. The deposits are held in an interest-bearing savings account by the lending institution, and may be added to any time the customer wants a higher credit limit. After a few months of regular payments, the bank may decide to offer normal credit terms to the customer. If the customer doesn't pay, the deposit is forfeited to the bank. Secured cards are a low-risk way for bad credit customers to redeem their standing, but the initial set-up can be expensive.
- Often, bad credit customers get store credit cards to increase their FICO score. However, these store cards can end up being another trap for incautious shoppers who overspend. For a retail store card to benefit the bad credit cardholder, they must spend only what they can pay back every month. Store cards can be like potato chips--one might seem to be enough, but it's easy to apply for too many. Customers should choose one or two cards and stick with them.
- Every person's credit needs are different; a card that one shopper finds useful may not aid someone else. It's best to check out reputable credit card websites for details on what will best suit individual credit needs. Sites like Credit Karma and Credit.com are reputable financial information websites. Your bank may also offer a secured or bad credit card option, so be sure to ask. Be wary of sites that don't clearly label advertising or sponsorship deals for customers--you need unbiased information, not spin. As legal information clearinghouse Nolo.com states, "Creditors want to see that you can handle more than one credit account at a time. But use all of the cards only if you can pay the charges in full each month--don't build up interest charges."
